401k After-Tax Contribution to Roth IRA

Submitted by Carol Berger on Fri, 2019-12-06 21:52

Client had a 401k with pre and after-tax contributions. The company sent the pre-tax money directly to the client’s account with custodian. However, the client received a check for the after-tax money and deposited it into his bank account. The client is thinking about keeping a small portion of this cash and sending the remainder to his Roth IRA. Is this OK to do or does this mess up the ability to rollover to his Roth?

Flag as spam

Permalink Submitted by Alan - IRA critic on Sat, 2019-12-07 00:42

It is OK to keep some cash and rollover the rest to the Roth IRA within 60 days from receipt of the after tax distribution. The portion kept will not be subject to tax or penalty, but the amount rolled over must be reported on line 4c of Form 1040 with “rollover” entered next to 4d. This will be a non taxable rollover to the Roth IRA, so there will not be a 5 year holding period to withdraw the Roth rollover money. Client needs to update the basis tracking for his Roth IRA unless his Roth is already qualified.

Permalink Submitted by David Mertz on Sat, 2019-12-07 00:58

The entire amount distributed from the traditional 401(k) (the sum of the box 1 amounts from both of the Forms 1099-R, one with code G for the portion directly rolled over and the other with code 1, 2 or 7 for the after-tax portion) must appear on 2019 Form 1040 line 4c.
If the check for the after tax money was instead supposed to be part of the direct rollover, included on the code G Form 1099-R instead of on a separate code 1,2 or 7 Form 1099-R, the check should have been deposited directly into the Roth IRA.

Permalink Submitted by Carol Berger on Mon, 2019-12-09 16:41

Hi DMx,I’m confused about the second bullet point. The client rolled everything out – pre and post tax. The company did a direct rollover to his IRA for the pre-tax and earnings on after-tax. But, for some reason, sent him a check for after-tax contributions.

Permalink Submitted by Gregory Hart on Mon, 2019-12-09 22:00

I’m dealing with this same issue, helping a client roll out of a plan in which she has a good chunk in after-tax, some even pre 87 aftertax. So a check that consists of after-tax contrbutions that is distributed/payable to a client can then be rolled over into a ROTH if it’s within the 60 day rollover window? I assume you would agree that it’s probably best practice to ask the plan admin to make the check payable to the clients ROTH IRA so there’s no question it’s being directly transferred to a ROTH IRA. As an aside, I haven’t had to deal with “after-tax” money for clients, as its fairly rare, the ability to transfer those after-tax contributions into a ROTH with no tax consquences is huge, is it not?

Permalink Submitted by David Mertz on Mon, 2019-12-09 18:48

I included that point mainly for others who might see this thread. In the case where the check consists entirely of after-tax money, how the check is negotiated doesn’t really change the tax consequences.
The check could have been made out to the client, in which case it’s a payment to the client that can be indirectly rolled over, or it could have been made out to a traditional or Roth IRA at the custodian, FBO the client), in which case the client should have been deposited directly into the IRA as a direct rollover and the client should not be able to deposit the check into a non-qualified brokerage account. However, some plans somewhat improperly make a direct-rollover check out simply to the custodian FBO the client, permitting the custodian to deposit the check into any type of account FBO the client, but if the deposit is not made into an account eligible to receive a direct rollover, this portion of the distribution fails to be a direct rollover despite how the plan reports it (with code G) on Form 1099-R.
If the IRS sees Forms 1099-R showing a certain amount as being directly rolled over yet sees Forms 5498 from IRA custodians showing that less was rolled over, the IRS might question the rollover or the taxable amount of the distribution. In this client’s case, though, doing only a partial rollover of the portion distributed by the check given to the client it wouldn’t create a tax issue because the portion is nontaxable either way. Still, if the plan reports it as a direct rollover of the entire amount it might trigger something in the IRS systems that are intended to catch the reporting errors and that could result in a need to provide explanation to the IRS.

Permalink Submitted by Carol Berger on Mon, 2019-12-09 20:51

Thanks so much for all of the responses! Always helpful.

The Retirement Savings Time Bomb Ticks Louder

Live Advisor Training with America's IRA Experts

The Retirement Savings Time Bomb Ticks Louder

Add new comment Cancel reply